The remortgage nightmare that’s lying in wait

Sarah Coles, head of personal finance at Hargreaves Lansdown, comments on the findings from its Opinium survey (of 2,000 people), showing the remortgage nightmare that’s lying in wait.

Key points from survey:

• • Two in five people with a mortgage say their payments haven’t gone up since interest rates started rising – because so many are on fixed rate deals.
  • One in five say their monthly payments have already risen more than £200 in the past 18 months.
  • 16% of people are already struggling with their mortgage payments – rising to 21% of those aged 55 and over.
  • Almost half of those with a mortgage (48%) say they’d struggle if their monthly repayments rose as little as £150.

Figures from a survey of 2,000 people by Opinium for Hargreaves Lansdown in May 2023

Sarah Coles says:

“There’s a remortgage nightmare lying in wait for more than 3 million people.

“They’ve been shielded from the horror of rate hikes so far by a fixed mortgage, and when their deal runs out, they face the full force of the rises in one single hit

“Anyone whose deal comes to an end in the coming year is set to see their monthly payments increase by an average of £192 [estimate from the Resolution Foundation], but almost two thirds of people said this would cause them financial problems [from Homeward Legal’s Opinium research].”

The nightmare:

“After 12 consecutive Bank of England rate rises, we’re sitting on a cumulative increase of 4.4%.

“Anyone on their lender’s standard variable rate, or a tracker, will have felt the pain immediately and often.

“However, the vast majority of people with mortgages have a fixed deal. As a result, around half of them haven’t yet borne the brunt of the hikes [estimate from the Resolution Foundation].

“The ONS calculated that 1.3 million fixed deals would come to an end in 2023, most of which were under 2%.

“At the moment, the average two-year fixed mortgage costs around 5.5%.

“If rates don’t fall back before they have to remortgage, it could spell catastrophe for hundreds of thousands of people.”

Most vulnerable:

“Those with large mortgages will see their payments increase the most.

“This doesn’t just include those on higher incomes who bought more expensive properties; it will also bring real pain for younger people, who bought more recently when prices were higher.

“We can see this in the rises that have already hit those aged 18-34. One in four say their monthly repayment has gone up more than £200 (24%).

“Anyone who bought after the rate hikes of the late 1980s won’t have had to deal with rises at this kind of speed before, so there’s a risk they won’t have factored it into their plans at all.

“However, on the plus side, there’s every chance their mortgage company has.

“Affordability calculators forced banks to assess whether people could afford their mortgages if rates were to rise.

“If their circumstances haven’t become significantly worse in the interim, there’s a decent chance they can stretch to bigger payments.

“The trouble is that their circumstances may well have deteriorated, as wages have fallen so far behind inflation. In March, they were a full 2% behind.

“Any spare cash may have been eaten up by energy bills and food shopping, so there’s little left for a mortgage shock.

“In March, the HL Savings & Resilience Barometer dug into just how bad financial problems could get after a remortgage.

“It looked at the critical moment when mortgage costs hit 25% of household income after tax, when people are considered to be at risk of defaulting on mortgage payments.

“It revealed that by the end of 2023, 2 million households would be at risk.

“It also found that 650,000 of these people won’t have enough savings to fall back on, and 347,000 of them not only won’t have enough savings, but will already be spending more than they have coming in – putting them at critical risk.”

The hope:

“There is always the hope that rates will fall back by the time you come to remortgage, sparing you the worst of the pain.

“Before the inflation figures were released this month, this seemed to be on the cards, as the market was pricing in one more rise, and fixed rate mortgages looked set to drop.

“Now the market is pricing in more hikes and mortgage rates have surged.

“There is still a chance that the market is overreacting, and rates could fall back again.

“However, large reductions in mortgage costs may require expectations of a Bank of England cut – and at the moment, that’s not on the cards until 2024.

“Even then, they’re expected to come down far more slowly than they increased, so it could take quite some time for mortgage costs to drift significantly lower.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay